The dollar dropped to its lowest level so far this year as rising investor optimism dented haven demand for the US currency on Monday.
The currency suffered as manufacturing surveys across the globe raised hopes that the worst of the recession might be over.
Global equities advanced as manufacturing purchasing managers’ indices beat expectations in the US, China, the eurozone and the UK.
Analysts said improved risk appetite saw investors abandon the relative safety of the dollar in search of yield.
“At the risk of exaggeration, there is only one story and it is growth,” said Marc Chandler at Brown Brothers Harriman. “The enhanced prospects for growth have cast a pall over the dollar.”
The dollar index, which tracks its progress against a basket of six currencies fell to a low of 77.844, its weakest level since mid-December.
The pound was one of the biggest winners after UK manufacturing PMI data fanned hopes the UK economy might pull out of recession in the third quarter.
The PMI index of manufacturing business activity rose to 50.8 from 47.4 in June, well above the consensus for a reading of 47.7 and creeping above the 50 level, indicating expansion in the sector for the first time since March 2008.
James Knightley at ING Financial Markets said that, based on the PMI survey’s relationship with GDP, the reading was consistent with the UK economy growing at an annual rate of 1 per cent in the second half of the year.
Analysts said the survey argued against the Bank of England extending its quantitative easing programme by any significant amount when it meets on Thursday.
By midday in New York, the pound rose 1.1 per cent to $1.6907 against the dollar, its strongest level since last October. Sterling also rose 0.2 per cent to a one-month high of £0.8520 against the euro and gained 1.6 per cent to Y160.94 against the yen.
Meanwhile, commodity-linked currencies also advanced strongly as raw materials prices pushed higher on hopes for stronger global growth.
The Australian dollar rose 0.9 per cent to a 10-month high of $0.8424 against the dollar. The New Zealand dollar also hit a 10-month peak against the dollar, climbing 1.3 per cent to $0.6680, while the Canadian dollar gained 1.1 per cent to C$1.0655 and the Norwegian krone rose 1.4 per cent to NKr6.0227.
The dollar also hit a fresh low for the year against the euro, falling 0.9 per cent to $1.4405, and dropped 1 per cent to SFr1.0579 against the Swiss franc.
But the dollar climbed 0.5 per cent to Y95.15 against the yen as rising confidence also stemmed haven demand for the Japanese currency.
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